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Recovering from holiday spending can be tough, but not impossible

You got everything you wanted for Christmas. Presents abounded underneath the tree and looks of joy and happiness were on the faces of your loved ones. It was the perfect day. Now, reality has set in. The credit card bills are coming in and you realize youve spent more than you had intended. Youre looking at your checkbook and looking at the charges youve made and realize youre going to be in a tight spot. What will you do? While making those charges magically disappear isnt going to happen, there are several things that can be done to get you back on the right track financially. Jonathan L. Schneiderman, financial advisor for Raymond James Financial Services, Plattsburgh, said the main thing to do is to develop a plan, including what expenses are necessary and what are not. Those facing charges theyve accrued on their credit cards may be inclined to panic, said Mr. Schneiderman. Its important, however, to examine your options closely. One option people face, said Mr. Schneiderman, is taking a line of home equity credit out to consolidate their credit card balances. Going from a 21 percent interest rate, he gave for an example, to a much lower rate while combing multiple payments into one is tempting, though very risky. On the face of it, it does sounds prudent, but in fact, its a terrible mistake, Mr. Schneiderman said. When you use a credit card, thats unsecured debt. When you switch to home equity, youre securing that debt with your home. If you cant make a home equity payment, you could essentially lose your home, because your credit has been secured. They can go after that asset. If you have debt on a credit card, they cant go after you for that meal at Applebees or that item of clothing you bought. Never move your credit card debt from unsecured to secured debt. Mr. Schneiderman also remarked those who are unwilling to part with even a portion of their savings accounts to pay off credit card debt are also working harder than they need. The single-digit percentage of interest you accrue on a savings or checking account is no match for the double-digit interest you pay out to creditors, he said. Some people dont want to part with the $20,000 they may have in their savings or checking account that they view as their emergency fund, said Mr. Schneiderman. They think they cant use that to pay off their debt because they will have nothing in the case of an emergency. Thats faulty thinking. Youd be better off taking the money out and paying off your credit card debt. Then, in the event the hot water heater does blow, use your credit card to float yourself a loan. If you dont have that debt, you can start to really build up your cash reserve without making payments with high interest rates at the same time. Consolidating balances on another card with lower interest rates is one method of helping to reduce the amount being paid out to creditors, said Mr. Schneiderman, though consumers should be wary of the fine print. A lot of it can be very unclear, so you have to know what youre getting into, Mr. Schneiderman said of the stipulations of certain credit card agreements. Do it carefully. Its not going to make your debt go away unless it goes along with an aggressive repayment solution. Consumers should also be aware every time they apply for a credit card, it affects their FICO score, the formula used to determine your credit risk. The higher the score, the better your credit rating is, and the likelihood of being approved for loans, and, in some cases, jobs and apartments, increases. Credit cards, Mr. Schneiderman said, should not carry a balance, meaning they should be paid off every month. While the method may seem impossible, it actually isnt. The interest rate you typically pay is an exorbitant amount. Making the minimum payment is not sufficient. Always pay off your balance. Now not everyone can do that, but if you cant, its indicative of the fact youre spending too much in general and living beyond your means. Instead of relying on a credit card, said Mr. Schneiderman, its best to look at your income and necessary expenditures such as utilities, transportation, food and clothing. Those expenditures, however, are not to be confused with having huge cable or satellite television packages, a high-end SUV that consumes large amounts of fuel, going out to eat regularly or expensive shoes or suits. Its a lot easier to reduce your spending than it is to increase your income, Mr. Schneiderman said. You cant just insist you get a raise to match how much youre spending. Instead, have one beer instead of three or four when you go out; dont buy your friends a round if you cant afford it. Reduce the number of channels you have, use your cell phone less, dine out less, spend less at the grocery store. The equation for a healthy bottom line, said Mr. Schneiderman, is simple. Your income, minus expenses, equals your deficit or your surplus, he said. If you have credit cards, that severely affects your equation. Making investments while having credit card debt is also an unsound decision. Many think making an investment may help pay off in the long run, and depending on the investment that may or may not be true. I liken it to building a front porch while the back porch is on fire, said Mr. Schneiderman. You can do one of two things you can build faster or go put out the fire. If a credit card has an interest rate of 19 or 21 percent and your investment is working hard for you earning 10.5 percent, youre losing proportionally to the fire that burning faster than you can build. Having an investment while having large amounts of credit card debt is a contradiction of ones ultimate goal when making an investment, Mr. Schneiderman said. The advice he would give would be to put out the fire first by paying off that debt then resume building with an investment plan. In order to get a harsh look at the reality of how long it takes to pay off a credit card, said Mr. Schneiderman, debt calculator are available on the Internet by simply typing debt calculator or credit card payment calculator into a search Web site. Resulting sites will ask what is your cards current balance, current monthly payment and interest rate then give you the amount of time it will take to pay off that balance. An example found at www.ditech.com , showed a $10,000 balance, with a monthly payment of $264 and at an interest rate of 21 percent, would take 63 months thats more than five years to pay off the total balance. When you pull out that credit card, you have to remember youre only deferring that payment for a short period of time. Its not a free ride, said Mr. Schneiderman. Its an obligation that shouldnt be taken lightly. That pair of shoes may look like a great deal at $29, but if it takes you six months to pay them off, it really isnt when you put them on a credit card, he added.

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